Pakistan: Listen to Dr Pasha carefully

Noted economist who previously held the positions of Finance Minister and Deputy Chairman Planning Commission Dr Hafeez A. Pasha has expressed his fears in a Business Recorder op-ed 'Stagflation feared' that country's growth could lower and inflation rise as a result of the programme recently signed with the International Monetary Fund by the PML (N) government. Stagflation is generally defined as a condition of slow economic growth and a relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation. Further, Dr Pasha has pointed out that Pakistan will receive a lower amount in disbursement from the Fund than it will repay through the year. Basically, the Fund has rescheduled its previous lending to Pakistan. The question that needs an answer is: What was the other option for this government? Default on repayment to international lender of the last resort - IMF! The government felt that the pain to the nation would have been worse had we not gone to the Fund for help. This newspaper had been consistently arguing in favour of a programme since last November. Both the then Finance Minister, Dr Hafeez Sheikh, and Deputy Chairman Planning Commission, Dr Nadeem-ul-Haq, were also for an IMF bailout. But the then President, Asif Ali Zardari, was not. And, he told Governor SBP Yaseen Anwar to manage the repayments. Forex reserves of the country were allowed to fall. It needs to be recognised that the value of PKR was better managed until end-June. Are we not seeing a repeat of 2007 when in an election year political compulsions stumped sound economic proposals? The conditions in 2008 (oil prices rose to record above US $145 on July 7 and after-effects of Bankruptcy of Lehman Brothers in September were felt the world over) but our forex reserves were also much more compared to under dollar 10 billion in 2013. Once we committed to Fund's conditionalities (prior actions) to purchase 125 million dollars from the interbank market by August 15, 2013, the PKR lost its value against the dollar by a massive six percent in only one month. This was far worse than 8 to 9 percent depreciation in one full year. A battered PKR is now a focal point for price-setting by all businesses. POL prices have been readjusted taking into account landed cost of oil in rupees. Similarly, electricity tariff has also been raised. So every move is just reinforcing each other. The PPP-led government also retired circular debt; adjusted upward the rupee parity from 62 to over Rs 80 to a dollar; raised POL prices; and also rationalised upward electricity tariff in the first year of coming into power in accordance with an agreement with the Fund. But it failed to restructure the economic fundamentals that held us back and led to persistently high fiscal deficits, thereby miserably failing to turn the economy around. There was very little focus on growth in FY2008 and there is hardly any now. After all we now project that growth will slip from 4.4 to 2.5 percent of GDP. Dr Pasha is right in saying that "revival of the economy has been sacrificed at the altar of macro-economic stabilisation." The Federal Budget for this year provides very little fiscal incentive to entrepreneurs or investors. Those who were already investment shy due to a bad law and order situation are now contemplating living in Dubai - where they can live off the tax differential available to non-residents over residents in Pakistan. The rich can make the move. They can come on Mondays to attend to their business and go back to Dubai on Thursdays. This option, however, is not available to the middle-class - the real engine of growth - who will be forced to face the likely spectre of low economic growth, relatively high inflation and diminishing job opportunities. We need to analyse what the prior actions sought by the Fund have achieved? A net purchase of 125 million dollars from foreign exchange spot market between July 1st and August 15th forced the PKR to become a currency with an exchange rate lower than it ought to be. That 'Pak rupee is undervalued' is a remark that has been widely attributed to Finance Minister Dar. By mechanically complying with requirement of the deal, there was though very little thought given by both the Fund staff and the government to where we are headed and whether the aims of the programme will be met? The situation will give birth to cost-push inflation (a phenomenon in which the general price levels rise due to increases in the cost of wages and raw materials) primarily due to PKR depreciation, POL price hike and spike in the tariff of electricity and later of gas. Here, it is also important to note that demand-pull (inflation resulting from increased demand outstripping readily available supply of goods and services) generally requires interest rate hikes. Inflation spike could now exceed 12.5 percent with food inflation even higher. Raising interest rates will have hardly any bearing - one way or another - on inflation. However, it would prick the stock market rise. Forex inflows will now be encouraged due to the Fund programme and not due to any policy intervention by the central bank. Definitely, lower growth would not be helpful in meeting our revenue target agreed with the Fund. Scaling down growth to 2.5 percent, says Dr Pasha, in the programme implies hardly any improvement in per capita income or in employment prospects. For any country faced with rising terrorism, like Pakistan, increasing unemployment with rising inflation is a deadly combination that the PML (N) government should have avoided. The bottom line is that pressure on exchange rate and interest rate are symptoms of the disease whose underlying cause is a burgeoning fiscal deficit and unsustainable trade deficit. Unless we overcome these twin deficits, we will be going round in circles instead of moving forward to reach a satisfactory decision or conclusion.